Some remain confident that the collateral damage from the U.S. financial crisis can be contained. South Korean steelmaker Posco and French central bank chief Christian Noyer are among those endorsing the notion that their economies are generating enough homegrown growth to escape the worst fallout from a shrinking U.S. economy.
But the USA is transmitting economic weakness to the rest of the world through two channels. A slowing economy here has a direct impact on other countries as U.S. consumers and businesses reduce purchases from foreign suppliers. At the same time, ever more intricate financial linkages expose foreign financial institutions to around $600 billion worth of complex asset-backed securities, which are now difficult to value in a market where almost no one wants to buy them. That's leading to major losses on global bank balance sheets, which spills over into sluggish lending.
"We have experienced a major financial shock. … We should expect a prolonged period of discomfort for individual banks and the financial system as a whole," Sir John Gieve, deputy governor of the Bank of England, said in a speech earlier this month.
As the U.S. economy struggles, it's casting an uneven shadow on the rest of the world. Neighbors Canada and Mexico, which send about 80% of their exports to the USA, are tightly yoked to Uncle Sam and will be among the first to feel the chill. The Bank of Canada earlier this month lowered its 2008 economic growth forecast to 1.8%. Europe, too, is slowing, amid indications that U.S.-style housing bubbles are bursting in countries such as Spain, Ireland, Portugal and the United Kingdom.
"As things in the U.S. blow up, financial institutions in Europe are put under pressure, and that triggers things there to blow up," says economist Tim Lee of Pi Economics in Stamford, Conn.
Emerging bright spots
So far, the so-called emerging markets stand out as a surprising economic haven. Policy reforms introduced since the 1997 Asian financial crisis, years of strong economic performance and huge stockpiles of foreign-exchange reserves are insulating countries such as China and Russia from the initial rounds of U.S.-spawned weakness.
Several key emerging economies sit on swollen stockpiles of hard-currency reserves. Their governments have ample cash to goose their domestic economies if the outlook for global growth deteriorates beyond expectations. China alone boasts a $1.5 trillion reserve, the consequence of the USA's ballooning trade deficit with Beijing.
"The size of emerging markets has increased noticeably in recent years. They have reached a size sufficient to buffer some of the cyclical movements in developed economies," says Gene Huang, chief economist of FedExfdx.
In China, for example, the economy now is roughly six times its size in 1990. Living standards, especially in cities, have risen accordingly and provided millions of young Chinese with conveniences and luxuries that their parents could have scarcely imagined.
In 2007, the economy grew at an annual rate of 11.4%, the fifth-consecutive year of double-digit increases. China's economy is steaming along so quickly that policymakers have been trying to cool it by raising interest rates and mandating larger down payments for property purchases. A little slowing, thanks to the U.S. downturn, will be welcomed.